Chapter 15 Choosing an appropriate investment strategy

Question 1

Investment risks definition

PVPS R

Answer 1

Probability of default
Variability of return
Probability of failing to achieve the investors objectives
Failure to prove solvency on a ongoing or discontinuance basis
Risk of under performing compared to competitors

Question 2

Main factors influencing institutional investment strategy

SOUNDER TRACTORS ES

Answer 2

Solvency requirements
Objectives 
Uncertainty of liabilities
Nature of liabilities
Diversification
Existing asset portfolio/ Expenses
Risk appetite/ Restrictions
Term of liabilities
Return expected over long-term from various asset classes
Accrual of future liabilities(Writing more business)/ Assets available in the market 
Currency of current liabilities 
Tax and cashflow considerations (income vs Capital growth vs taxation of both vs liquidity vs dealing costs)
Other funds' strategies 
Regulation
Size of the fund relative to the liabilities/.
Size of funding level/surplus
Liquidity of the fund
Ease of valuation 
Competitiveness(not for pensions)

Question 3

Main factors influencing individual investment strategies

PRINCES

Answer 3

Practical considerations (CEK)
-Lack of cash  
        No direct investment
        High expenses
        Cannot diversify 
        Cannot exploit short term opportunities 
- Limited knowledge 

Returns from different asset classes (FUT)

• Feel-good factors (utility, peace of mind)
• Undervalued assets
• Tax considerations (income vs capital gains)

Investment Freedom and constraints (LURE)

• Liquidity needs
• Uncertainty (provided for in liquid assets + insurance)
• Risk appetite
• Excess assets (Constraint on type of assets to choose)

Nature of assets and liabilities / Needs of investor

• CANT C
• R MeNTaL

Cashflow requirements
- Pension fund provision (longevity and real nature of requirements)

Expenses/ Expertise

Spread of market values (Volatility of market values mainly short term effects)

• Emotional effect
• Term of investment

Question 4

Investment constraints for individuals

4 Lack of Cash SADD

Answer 4

Lack of access to research facilities
Lack of up to date investment information
Lack of expertise to invest directly
Lack of time available

Not always have cash available for

• Short notice investment opportunities
• Achieve economies of scale
• Direct investment and remain well diversified
• Directly invest in large unit sizes

Question 5

The investment objective of a benefit provider

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Answer 5

Meet liabilities as the fall due: 
On an ongoing basis i.t.o.
- A statutory basis 
- A realistic basis 
On a discontinuance basis

Question 6

Investment characteristics

Answer 6

Security (risk)
Yield (real or nominal, running yield, expected return, compare with other assets)
Spread (diversification, volatility)
Term
Expenses / exchange rate
Marketability

Tax

Question 7

When comparing individual investment needs consider

R MeNTaL

Answer 7

Risk appetite
Method of saving - lump sum vs. regular income
Need for income vs capital growth
- Long term investment will require more capital growth returns
- For retired investors the income earned on investment is of great importance
Tax considerations
Liquidity